Chiding China

If your opponent is of choleric temperament, seek to irritate him.— Sun Tzu

As if it’s not enough to bicker over democracy, pollution, trade, and finance, the US and China can now add Internet censorship and hacking to the list.

Late Tuesday, Google (Nasdaq: GOOG) revealed that it had been targeted by Chinese online intruders spying on human-rights activists, and said it will stop censoring Chinese search results, even at the risk of getting booted from the country. At least 20 other companies had also been hacked, Google’s top lawyer charged. The next morning, US Secretary of State Hillary Clinton said the allegations raised “serious concerns” and called on China to address them.

Google gets some revenue but very little of its profit from China; its shares drifted less than 2% lower on the news. Those of Baidu.com (Nasdaq: BIDU) soared more than 12% on expectations that China’s homegrown search champion would grow even more dominant should Google leave.

Though little money is at stake, it is a dangerous rift all the same, implying that the political differences between China and the West now loom as major obstacles to business ties. This adds to the ill will created by the summer arrests of four Rio Tinto (NYSE: RTP) employees in China on suspicion of commercial spying. That case is now before Chinese prosecutors, who could take another six weeks to decide whether the imprisoned men, among them an Australian citizen, will stand trial.

Trade remains the biggest irritant of course, even more so now that China has surpassed Germany as the world’s leading exporter. The US trade deficit is growing again alongside a recovering economy, and though the deficit with China shrank last month, it still accounted for more than half the overall shortfall.

China has steadfastly resisted foreign calls to lift its dollar-pegged currency. Instead the Bank of China has just hiked loan reserve requirements on lenders, in a move that will restrain credit and domestic consumption. Chinese stocks and commodities wilted in the surprise move’s aftermath. But the bigger danger in the long run is that China’s cheap currency sparks a trans-Pacific trade war.

Or perhaps a Eurasian one. It’s doubtful that a stronger yuan would do much to bring back American jobs. But the weak Chinese currency is clearly sapping Europe’s fortunes. Former top exporter Germany has just reported a 5% annual GDP drop—its worst year since World War II—and a statistics official said the economy has stagnated for the last three months. Moody’s is forecasting a “slow death” for Greece. The manufacturing recovery in Italy and the UK has lost momentum, and the bitter winter will further chill growth.

David Fuller of Fullermoney argues that emerging markets are destined to continue outperforming as their economies catch up to the rich world’s living standards. And as consumer spending across Asia ramps up, Australian packager Amcor (OTC: AMCRY) should be among the beneficiaries, writes Carla Pasternak. Meanwhile, Irwin Michael and Gordon Papehave spotted value in a Canadian printer of currency as well as one of its stronger commercial landlords. Like Australia, Canada’s a big exporter of commodities. So their economies are tied to growth in India and China, without anything like the same level of risk.